By PAUL NOWELL, THE ASSOCIATED PRESS

Published 10:00 pm, Thursday, October 6, 2005

CHARLOTTE, N.C. -- Krispy Kreme Doughnuts Inc. will "vigorously defend" itself against a lawsuit filed by its largest franchise that contends company executives misappropriated marketing money and billed for phony charges, the company said Thursday.

Krispy Kreme spokeswoman Laura Smith said Thursday the company has been served with the lawsuit and would have no further comment beyond a short written statement pledging a vigorous defense.

The lawsuit, filed Sept. 29 in Los Angeles County Superior Court, accuses Krispy Kreme and its executives of making false representations to persuade franchise owners to personally guarantee the franchise's financial obligations. The suit also claims Krispy Kreme systematically inflated its prices and engaged in deceptive business practices.

Krispy Kreme also required the franchise to contribute to a brand fund that Krispy Kreme was required to spend on marketing and advertising, Reinis and Glickman contend.

Krispy Kreme appears to have misappropriated the money and refuses to account for the expenditures, the lawsuit claims.

Along with Krispy Kreme, the defendants include Scott Livengood, former chief executive; Phil Waugh, former senior vice president of franchising; John Tate, former chief operating officer; and Kroll Zolfo Cooper, the consultant hired by the Krispy Kreme board of directors to manage the company after the departure of Livengood.

The company faces several other lawsuits, including one that alleges workers lost millions of dollars in retirement savings because company executives hid evidence of declining sales and profits.

Krispy Kreme is also the target of a federal criminal inquiry in New York and a Securities and Exchange Commission investigation into financial irregularities.